Myths and Truths about Investing in Africa

Although many U.S investors think of opening their portfolios to more African market exposure as highly risky, the reality is that African markets have become the growth engines in an era of anemic economic growth in developed markets such as  the U.S., Europe and Japan. Due to structural reforms, some of Africa’s economies have grown annually by at least 5% since the financial crisis of 2008. However, despite the attractiveness of African economic reforms and fascinating growth rates, they are somehow misunderstood and many investors hesitate to include African market asset classes such as equities and bonds in their portfolios.

There are a lot of misconceptions about investing in Africa. Some are outdated. Similar to how today’s phones no longer have rotary dials, African economies have evolved from what they were years ago. Let’s look at two common myths and truths about investing in Africa:

Myth 1: Commodities are the main driver of African economic growth.

The Truth: Based on projections by the International Monetary Fund, some of Africa’s fastest growing economies, such as Rwanda (7.5% in 2013 and 2014), Ethiopia ( 7.0% in 2013, 7.5% in 2014), Burkina Faso (6.5% in 2013, 6.4% in 2014), Mozambique(7.0% in 2013, 8.5% in 2014), Tanzania(7.0% in 2013, 7.2% in 2014) and Uganda(5.6% in 2013, 6.5% in 2014) are driven by structural reforms and investments in agribusiness, tourism, air travel, aluminum, and electricity production.

Myth 2: Investing in the economies of African countries involves risks not typically associated with investments in securities of issuers in more developed economies.

The Truth:  African economies are smaller and market statistics are harder to come by. However, some small African economies have a better overall business environment than some large emerging markets. Take Rwanda for example. According to the World Bank’s “Doing Business 2014,” Rwanda is ranked 32nd while Russia is ranked at the 92nd spot in the overall ease of doing business.

 DB_2014a

African economies have evolved thanks to sound reforms that have led to stellar growth. This offers opportunities for investors who are seeking income to consider. To determine if an African asset class is right for you, talk to a financial professional who can understand your goals, preferences, risk tolerance and time frame to help you diversify and achieve your financial goals.

Remittances to sub-Saharan Africa suffer from at least 3 hurdles

Remittances to developing countries are forecasted to grow by 6.3% in 2013 to $414 billion, according to World Bank estimates released in October 2013. But high transaction costs and little competition hurt remittances to sub-Saharan Africa. To make matters even more challenging, household income in the United States, a key source of remittances, has not recovered from the financial crisis of 2008 as illustrated in the following chart.

income_struggling_oct2013

Guess which air travel hubs offer more daily seat capacity than New York City to sub-Saharan Africa?

The United States is one of five top source markets for tourism in sub-Saharan Africa. But, this report –  “Tourism in Africa: Harnessing Tourism for Growth and Improved Livelihoods” by Iain Christie, Eneida Fernandes, Hannah Messerli, and Louise Twining-Ward, published in October 2013 by the World Bank – is what happens when U.S. airlines are so risk averse about sub-Saharan Africa while the rest of the world feeds on its tourism potentials. “Long-haul connections are dominated by a small number of foreign carriers, such as Air France, British Airways, Brussels Airlines, Emirates, KLM, SWISS, and Virgin. Airline routings are strongly connected to former colonial interests and to countries with a common language,” says the report.

Top 75 Routes by Daily Seat Capacity, August, 2010

Flights_to_Africa

Via The World Bank.

Share this with your friends who complain about the costs and constraints of direct flights from the U.S to sub-Saharan Africa.

IMF Cuts sub-Saharan Africa’s Growth Forecast For 2013 And 2014

For investors with portfolios that include assets in frontier markets in sub-Saharan Africa, economic growth is forecasted to be slower than expected in 2013 and 2014, the International Monetary Fund (IMF) said in its World Economic Outlook, October 2013.
The IMF revised sub-Saharan Africa’s growth for 2013 and 2014 downward by about ½ percentage points to 5.0% and 6.0% respectively. Slightly downward revisions for 2013 reflect small spillovers from global economic downturns (U.S., Europe and China) and country-specific drawbacks such as reduced oil production in Nigeria, delay in budget execution in Angola and tense industrial relations in South Africa. Downward revisions for 2014 reflect weakness in international commodity prices that could hurt production in sub-Saharan Africa, slower growth in China that could affect exporting countries in sub-Saharan Africa, insufficient rainfall that could hurt agricultural production, and South Africa’s weak investor and consumer confidence that could weigh on economic performance.

Robust Growth Expected To Accelerate
Despite the downward revision, “growth in sub-Saharan Africa remained robust in 2012-2013 and is expected to accelerate somewhat in 2014, reflecting strong domestic demand in most of the region,” the IMF said. Frontier markets in sub-Saharan Africa have a loose link to the volatility of global financial markets. The IMF World Economic Outlook, October 2013, assumes that the U.S. partial government shutdown that started on October 1, 2013 will be short-lived and that the U.S. debt ceiling will be raised before October 17, 2013 to avert a global economic calamity.
Oil exporters combined (such as, Nigeria, Angola, Equatorial Guinea, Gabon, Republic of Congo, etc.) are projected to grow in 2013 and 2014 by 5.8% and 7.0% respectively.
Middle income countries combined (such as, South Africa, Cameroon, Ghana, Côte d’Ivoire, Botswana, Senegal, etc.) are forecasted to grow in 2013 and 2014 by 3.3% and 3.9% respectively.
Low income countries combined (such as, Ethiopia, Kenya, Tanzania, Uganda, Democratic Republic of Congo, Mozambique, etc.) are expected to grow the fastest in 2013 and 2014 by 6.5% and 8.1% respectively.

Traders Upbeat On Egypt After Morsi Ousted

On July 4, 2013, Matthew Davies of BBC News wrote that the Egyptian stock exchange rose by 7% from traders’ sentiments and expectations – at least for a day – of a better Egyptian economy in the years ahead.

Egypt’s economic woes have hurt U.S. exports in the last few years. Total U.S. merchandise exports to Egypt declined by 12% in 2012 down from $6.2 billion in 2011. U.S. exports to Egypt are dominated by agricultural products, which declined by 42% in 2012 relative to 2011. This coincidently is the period Mr. Morsi was in power. US_Exp_Egypt

Now that Mr. Morsi is gone, is it time to be bullish on Egypt? The numbers will tell with time.

South Africa is less attractive for your nest egg?

Nest_egg_protectionAmericans’ number one goal is retirement. The federal government has several incentives to help workers save for retirement, such as, tax advantages in 401(k) and IRA accounts. Future retirees decide how and where to invest their savings in order to achieve their retirement goals. South Africa is an emerging market that attracts investments for retirement. But, for the second half of 2013, Russ Koesterich, Chief Investment Strategist at BLACKROCK – an investment firm, is cautioning investors seeking his opinion on how to position their portfolios for the second half of 2013 to “selectively trim some exposure” to South Africa, amongst other concerns. The reason is that the country looks expensive given the prospects for slow economic growth and evolving political uncertainty. Read more.

U.S. Exports to Tanzania

US_Exports_Tanzania

U.S. Exports to Tanzania are dominated by machinery, computer products, chemicals and used merchandise. How will President Obama’s visit to Tanzania make a difference?

 

Follow

Get every new post delivered to your Inbox.

Join 60 other followers